Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto included in Item 8 “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. This section of this Form 10-K generally discusses fiscal 2022 and 2021 items and year-over-year comparisons between fiscal 2022 and 2021. Discussions of fiscal 2020 items and year-over-year comparisons between fiscal 2021 and 2020 are not included in this Form 10-K, and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2021. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties, including those described under the heading “Special Note Regarding Forward-Looking Statements.” You should review the disclosure under Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Our fiscal years ended January 31, 2022, January 31, 2021, and January 31, 2020, are referred to herein as fiscal 2022, fiscal 2021, and fiscal 2020, respectively.
Overview
Founded in 2011, CrowdStrike reinvented cybersecurity for the cloud era and transformed the way cybersecurity is delivered and experienced by customers. When we started CrowdStrike, cyberattackers had an asymmetric advantage over legacy cybersecurity products that could not keep pace with the rapid changes in adversary tactics. We took a fundamentally different approach to solve this problem with the CrowdStrike Falcon platform – the first, true cloud-native platform capable of harnessing vast amounts of security and enterprise data to deliver highly modular solutions through a single lightweight agent. Our pioneering platform approach keeps customers ahead of attackers by automatically detecting and preventing threats to stop breaches.
We believe our approach has defined a new category called the Security Cloud, which has the power to transform the cybersecurity industry the same way the cloud has transformed the customer relationship management, human resources, and service management industries. Using cloud-scale AI, our Security Cloud enriches and correlates trillions of cybersecurity events per week with indicators of attack, threat intelligence and enterprise data (including data from across endpoints, workloads, identities, DevOps, IT assets and configurations) to create actionable data, identify shifts in adversary tactics and automatically prevent threats in real-time across our customer base. The more data that is fed into our Falcon platform, the more intelligent our Security Cloud becomes, and the more our customers benefit, creating a powerful network effect that increases the overall value we provide.
In March 2020, the World Health Organization declared the COVID-19 outbreak to be a pandemic. Since then, the COVID-19 pandemic has rapidly spread across the globe and has already resulted in significant volatility, uncertainty, and economic disruption. Since the pandemic commenced, we have implemented several measures to help protect the health and safety of our employees around the globe. In addition, in response to the uncertain macroeconomic environment, we converted all of our marketable securities to cash and cash equivalents during the three months ended April 30, 2020 and all of our investments were classified as cash and cash equivalents as of January 31, 2022. Thus far, the impact of the pandemic has been modest. Our gross retention rate for fiscal 2022 remained consistently high and our dollar-based net retention rate was above 120 percent throughout fiscal year 2022 as we continued to expand the number of endpoints and modules within existing customers.
We continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, and stockholders. The extent to which the COVID-19 pandemic may impact our longer-term operational and financial performance remains uncertain. Furthermore, due to our subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods, if at all. The extent of the impact of the COVID-19 pandemic will depend on several factors, including the pace of reopening the economy around the world; the possible resurgence in the spread of the virus; the development cycle of therapeutics and vaccines; the impact on our
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customers and our sales cycles; the impact on our customer, employee, and industry events; and the effect on our vendors. Please see Part I, Item IA, “Risk Factors” for a further description of the material risks we currently face, including risks related to the COVID-19 pandemic.
On March 5, 2021, we acquired Humio Limited (“Humio”), a privately-held company that is a leading provider of high-performance cloud log management and observability technology. The acquisition was accounted for as a business combination. The total consideration transferred was $370.3 million which consisted of $353.8 million in cash, net of $12.5 million cash acquired, and $4.0 million representing the fair value of replacement equity awards attributable to pre-acquisition service. The purchase price was allocated to identified intangible assets, which include developed technology, customer relationships and trade names, of $75.6 million, net tangible assets acquired of $3.4 million and goodwill of $291.3 million, representing the excess of the purchase price over the fair value of net tangible and intangible assets acquired.
On November 29, 2021, we acquired Secure Circle, LLC (“SecureCircle”), a SaaS-based cybersecurity service that extends Zero Trust security to data on, from and to the endpoint. The acquisition was accounted for as a business combination. The total consideration transferred was $60.8 million, which consisted solely of cash.. The purchase price was allocated, on a preliminary basis, to identified intangible assets, which include developed technology and customer relationships of $18.3 million, net tangible assets acquired of $(0.5) million and goodwill of $43.0 million, representing the excess of the purchase price over the fair value of net tangible and intangible assets acquired.
Our Go-To-Market Strategy
We sell subscriptions to our Falcon platform and cloud modules to organizations across multiple industries. We primarily sell subscriptions to our Falcon platform and cloud modules through our direct sales team that leverages our network of channel partners. Our direct sales team is comprised of field sales and inside sales professionals who are segmented by a customer’s number of endpoints.
We have a low friction land-and-expand sales strategy. When customers deploy our Falcon platform, they can start with any number of cloud modules and easily add additional cloud modules. Once customers experience the benefits of our Falcon platform, they often expand their adoption over time by adding more endpoints or purchasing additional modules. We also use our sales team to identify current customers who may be interested in free trials of additional cloud modules, which serves as a powerful driver of our land-and-expand model. By segmenting our sales teams, we can deploy a low-touch sales model that efficiently identifies prospective customers.
We began as a solution for large enterprises, but the flexibility and scalability of our Falcon platform has enabled us to seamlessly offer our solution to customers of any size. We have expanded our sales focus to include any sized organization without the need to modify our Falcon platform for small and medium sized businesses.
A substantial majority of our customers purchase subscriptions with a term of one year. Our subscriptions are generally priced on a per-endpoint and per-module basis. We recognize revenue from our subscriptions ratably over the term of the subscription. We also generate revenue from our incident response and proactive professional services, which are generally priced on a time and materials basis. We view our professional services business primarily as an opportunity to cross-sell subscriptions to our Falcon platform and cloud modules.
Certain Factors Affecting Our Performance
Adoption of Our Solutions. We believe our future success depends in large part on the growth in the market for cloud-based SaaS-delivered endpoint security solutions. Many organizations have not yet abandoned the on-premise legacy products in which they have invested substantial personnel and financial resources to design and maintain. As a result, it is difficult to predict customer adoption rates and demand for our cloud-based solutions.
New Customer Acquisition. Our future growth depends in large part on our ability to acquire new customers. If our efforts to attract new customers are not successful, our revenue and rate of revenue growth may decline. We believe that our go-to-market strategy and the flexibility and scalability of our Falcon platform allow us to rapidly expand our customer base. Our incident response and proactive services also help drive new customer acquisitions, as many of these professional services customers subsequently purchase subscriptions to our Falcon platform. Many organizations have not yet adopted cloud-based
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security solutions, and since our Falcon platform has offerings for organizations of all sizes, worldwide, and across industries, we believe this presents a significant opportunity for growth.
Maintain Customer Retention and Increase Sales. Our ability to increase revenue depends in large part on our ability to retain our existing customers and increase the ARR of their subscriptions. We focus on increasing sales to our existing customers by expanding their deployments to more endpoints and selling additional cloud modules for increased functionality. Over time we have transitioned our platform from a single offering into highly-integrated offerings of multiple SKU cloud modules.
Invest in Growth. We believe that our market opportunity is large and requires us to continue to invest significantly in sales and marketing efforts to further grow our customer base, both domestically and internationally. Our open cloud architecture and single data model have allowed us to rapidly build and deploy new cloud modules, and we expect to continue investing in those efforts to further enhance our technology platform and product functionality. In addition to our ongoing investment in research and development, we may also pursue acquisitions of businesses, technologies, and assets that complement and expand the functionality of our Falcon platform, add to our technology or security expertise, or bolster our leadership position by gaining access to new customers or markets. Furthermore, we expect our general and administrative expenses to increase in dollar amount for the foreseeable future given the additional expenses for accounting, compliance, and investor relations as we grow as a public company.
Key Metrics
We monitor the following key metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions.
Subscription Customers
We define a subscription customer as a separate legal entity that has entered into a distinct subscription agreement for access to Falcon platform for which the term has not ended or with which we are negotiating a renewal contract. We do not consider our channel partners as customers, and we treat managed service security providers, who may purchase our products on behalf of multiple companies, as a single customer. While initially we focused our sales and marketing efforts on large enterprises, in recent years we have also increased our sales and marketing to small and medium sized businesses.
The following table sets forth the number of our subscription customers as of the dates presented:
As of January 31,
2022 2021 2020
Subscription customers 16,325 9,896 5,431
Year-over-year growth 65 % 82 % 116 %
We added 6,429 net new subscription customers during fiscal 2022, including 145 from the acquisitions of Humio and SecureCircle, for a total of 16,325 subscription customers as of January 31, 2022, representing 65% growth year-over-year.
Annual Recurring Revenue ( “ ARR ” )
ARR is calculated as the annualized value of our customer subscription contracts as of the measurement date, assuming any contract that expires during the next 12 months is renewed on its existing terms. To the extent that we are negotiating a renewal with a customer after the expiration of the subscription, we continue to include that revenue in ARR if we are actively in discussion with such an organization for a new subscription or renewal, or until such organization notifies us that it is not renewing its subscription.
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The following table sets forth our ARR as of the dates presented (dollars in thousands):
As of January 31,
2022 2021 2020
Annual recurring revenue $ 1,731,342 $ 1,050,051 $ 600,456
Year-over-year growth 65 % 75 % 92 %
ARR increased 65% year-over-year and grew to $1.7 billion as of January 31, 2022, of which $681.3 million was net new ARR added during fiscal 2022, including $4.5 million from the acquisition of Humio and SecureCircle.
Dollar-Based Net Retention Rate
Our dollar-based net retention rate compares our ARR from a set of subscription customers against the same metric for those subscription customers from the prior year. Our dollar-based net retention rate reflects customer renewals, expansion, contraction, and churn, and excludes revenue from our incident response and proactive services. We calculate our dollar-based net retention rate as of period end by starting with the ARR from all subscription customers as of 12 months prior to such period end, or Prior Period ARR. We then calculate the ARR from these same subscription customers as of the current period end, or Current Period ARR. Current Period ARR includes any expansion and is net of contraction or churn over the trailing 12 months but excludes revenue from new subscription customers in the current period. We then divide the Current Period ARR by the Prior Period ARR to arrive at our dollar-based net retention rate.
Our dollar-based net retention rate was above 120% throughout fiscal years 2022, 2021 and 2020. Our dollar-based net retention rate can fluctuate from period to period due to large customer contracts in a given period, which may reduce our dollar-based net retention rate in subsequent periods if the customer makes a larger upfront purchase and does not continue to increase purchases.
As of January 31,
2022 2021 2020
Dollar-based net retention rate 123.9 % 124.8 % 123.5 %
Our dollar-based net retention rate has varied from quarter to quarter due to a number of factors and we expect that trend to continue. In addition, we have seen strong success with our strategy to land bigger deals with more modules, and we are also seeing an acceleration in our acquisition of new customers. While we view these two trends as positive developments, they have a natural trade off on our ability to expand business with existing customers in the near term.
Components of Our Results of Operations
Revenue
Subscription Revenue. Subscription revenue primarily consists of subscription fees for our Falcon platform and additional cloud modules that are supported by our cloud-based platform. Subscription revenue is driven primarily by the number of subscription customers, the number of endpoints per customer, and the number of cloud modules included in the subscription. We recognize subscription revenue ratably over the term of the agreement, which is generally one to three years. Because the majority of our subscription customers are billed upfront, we have recorded significant deferred revenue. Consequently, a substantial portion of the revenue that we report in each period is attributable to the recognition of deferred revenue relating to subscriptions that we entered into during previous periods. The majority of our customers are invoiced annually in advance or multi-year in advance.
Professional Services Revenue. Professional services revenue includes incident response and proactive services, forensic and malware analysis, and attribution analysis. Professional services are generally sold separately from subscriptions to our Falcon platform, although customers frequently enter into a separate arrangement to purchase subscriptions to our Falcon platform at the conclusion of a professional services arrangement. Professional services are available through hourly rate and fixed fee contracts, one-time and ongoing engagements, and retainer-based agreements. For time and materials and retainer-
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based arrangements, revenue is recognized as services are performed. Fixed fee contracts account for an immaterial portion of our revenue.
Cost of Revenue
Subscription Cost of Revenue. Subscription cost of revenue consists primarily of costs related to hosting our cloud-based Falcon platform in data centers, amortization of our capitalized internal-use software, employee-related costs such as salaries and bonuses, stock-based compensation expense, benefits costs associated with our operations and support personnel, software license fees, property and equipment depreciation, amortization of acquired intangibles, and an allocated portion of facilities and administrative costs.
As new customers subscribe to our platform and existing subscription customers increase the number of endpoints on our Falcon platform, our cost of revenue will increase due to greater cloud hosting costs related to powering new cloud modules and the incremental costs for storing additional data collected for such cloud modules and employee-related costs. We intend to continue to invest additional resources in our cloud platform and our customer support organizations as we grow our business. The level and timing of investment in these areas could affect our cost of revenue in the future.
Professional Services Cost of Revenue. Professional services cost of revenue consists primarily of employee-related costs, such as salaries and bonuses, stock-based compensation expense, technology, property and equipment depreciation, and an allocated portion of facilities and administrative costs.
Gross Profit and Gross Margin
Gross profit and gross margin have been and will continue to be affected by various factors, including the timing of our acquisition of new subscription customers, renewals from existing subscription customers, sales of additional modules to existing subscription customers, the data center and bandwidth costs associated with operating our cloud platform, the extent to which we expand our customer support and cloud operations organizations, and the extent to which we can increase the efficiency of our technology, infrastructure, and data centers through technological improvements. We expect our gross profit to increase in dollar amount and our gross margin to increase modestly over the long term, although our gross margin could fluctuate from period to period depending on the interplay of these factors. Demand for our incident response services is driven by the number of breaches experienced by non-customers. Also, we view our professional services solutions in the context of our larger business and as a significant lead generator for new subscriptions. Because of these factors, our services revenue and gross margin may fluctuate over time.
Operating Expenses
Our operating expenses consist of sales and marketing, research and development and general administrative expenses. For each of these categories of expense, employee-related expenses are the most significant component, which include salaries, employee bonuses, sales commissions, and employer payroll tax. Operating expenses also include an allocated portion of overhead costs for facilities and IT.
Sales and Marketing. Sales and marketing expenses primarily consist of employee-related expenses such as salaries, commissions, and bonuses. Sales and marketing expenses also include stock-based compensation; expenses related to our Fal.Con customer conference and other marketing events; an allocated portion of facilities and administrative expenses; amortization of acquired intangibles, and cloud hosting and related services costs related to proof of value efforts. We capitalize and amortize sales commissions and any other incremental payments made upon the initial acquisition of a subscription or upsells to existing customers to sales and marketing expense over the estimated customer life, and capitalize and amortize any such expenses paid for the renewal of a subscription to sales and marketing expense over the term of the renewal.
We expect sales and marketing expenses to increase in dollar amount as we continue to make significant investments in our sales and marketing organization to drive additional revenue, further penetrate the market, and expand our global customer base. However, we anticipate sales and marketing expenses to decrease as a percentage of our total revenue over time, although our sales and marketing expenses may fluctuate as a percentage of our total revenue from period-to-period depending on the timing of these expenses.
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Research and Development. Research and development expenses primarily consist of employee-related expenses such as salaries and bonuses; stock-based compensation; consulting expenses related to the design, development, testing, and enhancements of our subscription services; and an allocated portion of facilities and administrative expenses. Our cloud platform is software-driven, and our research and development teams employ software engineers in the design, and the related development, testing, certification, and support of these solutions.
We expect research and development expenses to increase in dollar amount as we continue to increase investments in our technology architecture and software platform. However, we anticipate research and development expenses to decrease as a percentage of our total revenue over time, although our research and development expenses may fluctuate as a percentage of our total revenue from period-to-period depending on the timing of these expenses.
General and Administrative. General and administrative expenses consist of employee-related expenses such as salaries and bonuses; stock-based compensation; and related expenses for our executive, finance, human resources, and legal organizations. In addition, general and administrative expenses include outside legal, accounting, and other professional fees; and an allocated portion of facilities and administrative expenses.
We expect general and administrative expenses to increase in dollar amount over time. However, we anticipate general and administrative expenses to decrease as a percentage of our total revenue over time although our general and administrative expenses may fluctuate as a percentage of our total revenue from period-to-period depending on the timing of these expenses.
Interest Expense. Interest Expense consists primarily of interest expense from amortization of debt issuance costs, contractual interest expense for our Senior Notes issued in January 2021, and amortization of debt issuance costs on our secured revolving credit facility.
Other Income, Net. Other income, net, consists primarily of income earned on our cash and cash equivalents, if any; gain on strategic investments and foreign currency transaction gains and losses.
Provision for Income Taxes. Provision for income taxes consists of state income taxes in the United States, foreign income taxes including taxes related to the intercompany sale of intellectual property from Humio and withholding taxes related to customer payments in certain foreign jurisdictions in which we conduct business. We maintain a full valuation allowance on our U.S. federal and state and UK deferred tax assets that we have determined are not realizable on a more likely than not basis.
Net Income Attributable to Non-controlling Interest . Net income attributable to non-controlling interest consists of the Falcon Funds’ non-controlling interest share of mark-to-market gains and interest income from our strategic investments.
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Results of Operations
The following tables set forth our consolidated statements of operations for each period presented (in thousands, except percentages):
Year Ended January 31,
2022 2021 2020
Revenue
Subscription $ 1,359,537 $ 804,670 $ 436,323
Professional services 92,057 69,768 45,090
Total revenue 1,451,594 874,438 481,413
Cost of revenue
Subscription 321,904 185,212 112,474
Professional services 61,317 44,333 29,153
Total cost of revenue 383,221 229,545 141,627
Gross profit 1,068,373 644,893 339,786
Operating expenses
Sales and marketing 616,546 401,316 266,595
Research and development 371,283 214,670 130,188
General and administrative 223,092 121,436 89,068
Total operating expenses 1,210,921 737,422 485,851
Loss from operations (142,548) (92,529) (146,065)
Interest expense (25,231) (1,559) (442)
Other income, net 7,756 6,219 6,725
Loss before provision for income taxes (160,023) (87,869) (139,782)
Provision for income taxes 72,355 4,760 1,997
Net loss (232,378) (92,629) (141,779)
Net income attributable to noncontrolling interest 2,424 — —
Net loss attributable to CrowdStrike $ (234,802) $ (92,629) $ (141,779)
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The following table presents the components of our consolidated statements of operations as a percentage of total revenue for the periods presented:
Year Ended January 31,
2022 2021 2020
% % %
Revenue
Subscription 94 % 92 % 91 %
Professional services 6 % 8 % 9 %
Total revenue 100 % 100 % 100 %
Cost of revenue
Subscription 22 % 21 % 23 %
Professional services 4 % 5 % 6 %
Total cost of revenue 26 % 26 % 29 %
Gross profit 74 % 74 % 71 %
Operating expenses
Sales and marketing 42 % 46 % 55 %
Research and development 26 % 25 % 27 %
General and administrative 15 % 14 % 19 %
Total operating expenses 83 % 84 % 101 %
Loss from operations (10) % (11) % (30) %
Interest expense (2) % — % — %
Other income, net 1 % 1 % 1 %
Loss before provision for income taxes (11) % (10) % (29) %
Provision for income taxes 5 % 1 % — %
Net loss (16) % (11) % (29) %
Net income (loss) attributable to noncontrolling interest — % — % — %
Net loss attributable to CrowdStrike (16) % (11) % (29) %
Comparison of Fiscal 2022 and Fiscal 2021
Revenue
The following shows total revenue from subscriptions and professional services for fiscal 2022, as compared to fiscal 2021 (in thousands, except percentages):
Year Ended January 31, Change
2022 2021 $ %
Subscription $ 1,359,537 $ 804,670 $ 554,867 69 %
Professional services 92,057 69,768 22,289 32 %
Total revenue $ 1,451,594 $ 874,438 $ 577,156 66 %
Total revenue increased by $577.2 million, or 66%, in fiscal 2022, compared to fiscal 2021. Subscription revenue accounted for 94% of our total revenue in fiscal 2022, and 92% in fiscal 2021. Professional services revenue accounted for 6% of our total revenue in fiscal 2022 and 8% in fiscal 2021.
Subscription revenue increased by $554.9 million, or 69%, in fiscal 2022, compared to fiscal 2021. This increase was primarily attributable to the addition of new subscription customers, as we increased our customer base by 65%, fro m 9,896 subscription customers in fiscal 2021 to 16,325 subscription customers in fiscal 2022. S ubscription revenue from new customers, subscription revenue from the renewal of existing customers, and subscription revenue from the sale of additional endpoints and additional modules to existing customers accounted for 34% , 42%, and 24% of total subscription revenue in
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fiscal 2022, respectively. Subscription revenue from new customers, subscription revenue from the renewal of existing customers, and subscription revenue from the sale of additional endpoints and additional modules to existing customers accounted for 33%, 36%, and 31% of total subscription revenue in fiscal 2021, respectively.
Professional services revenue increased by $22.3 million, or 32%, in fiscal 2022 , compared to fiscal 2021, which was primarily attributable to an increase in the number of professional service hours performed and increase in services offerings that are not based on billable hours.
The following shows cost of revenue related to subscriptions and professional services for fiscal 2022, as compared to fiscal 2021 (in thousands, except percentages):
Year Ended January 31, Change
2022 2021 $ %
Subscription $ 321,904 $ 185,212 $ 136,692 74 %
Professional services 61,317 44,333 16,984 38 %
Total cost of revenue $ 383,221 $ 229,545 $ 153,676 67 %
Total cost of revenue increased by $153.7 million, or 67%, in fiscal 2022 , compared to fiscal 2021. Subscription cost of revenue increased by $136.7 million, or 74%, in fiscal 2022 , compared to fiscal 2021. The increase in subscription cost of revenue was primarily due to an increase in cloud hosting and related services cost of $58.7 million driven by increased customer activity, an increase in employee-related expenses of $37.7 million driven by a 55% increase in average headcount, an increase in stock-based compensation expense of $10.3 million, an increase in amortization of intangible assets of $9.7 million, an increase in depreciation of data center equipment of $7.7 million, an increase in allocated overhead costs of $4.9 million, an increase in depreciation of internal-use software of $4.3 million, and an increase in employee health insurance costs of $1.8 million.
Professional services cost of revenue increased by $17.0 million, or 38%, in fiscal 2022 , compared to fiscal 2021. The increase in professional services cost of revenue was primarily due to an increase in employee-related expenses of $10.0 million driven by an increase in average headcount of 43%, an increase in stock-based compensation expense of $4.0 million, an increase in allocated overhead costs of $0.8 million, and an increase in employee health insurance costs of $0.6 million.
The following shows gross profit and gross margin for subscriptions and professional services for fiscal 2022, as compared to fiscal 2021 (in thousands, except percentages):
Year Ended January 31, Change
2022 2021 $ %
Subscription gross profit $ 1,037,633 $ 619,458 $ 418,175 68 %
Professional services gross profit 30,740 25,435 5,305 21 %
Total gross profit $ 1,068,373 $ 644,893 $ 423,480 66 %
Year Ended January 31, Change
2022 2021
Subscription gross margin 76 % 77 % (1) %
Professional services gross margin 33 % 36 % (3) %
Total gross margin 74 % 74 % — %
Subscription gross margin slightly decreased by 1%, in fiscal 2022 , compared to fiscal 2021. The decrease in subscription gross margin was primarily due to higher intangibles amortization resulting from acquisitions, higher stock-based compensation expense, and higher cloud services costs per sensor, partially offset by continued expansion of module adoption during fiscal 2022 , compared to fiscal 2021. As of January 31, 2022, 69% of our customer base had adopted four or more modules, 57% of our customer base had adopted five or more modules, and 34% of our customer base had adopted six or more modules. As of January 31, 2021, 63% of our customer base had adopted four or more modules, 47% of our customer base had adopted five or more modules, and 24% of our customer base had adopted six or more modules.
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Professional services gross margin decreased by 3% in fiscal 2022, compared to fiscal 2021 . The decrease in professional services gross margin was primarily due to higher employee-related expenses and higher stock-based compensation, partially offset with an increase in the number of professional service hours performed and increase in services offerings that are not based on billable hours during fiscal 2022 compared to fiscal 2021.
Operating Expenses
Sales and Marketing
The following shows sales and marketing expenses for fiscal 2022, as compared to fiscal 2021 (in thousands, except percentages):
Year Ended January 31, Change
2022 2021 $ %
Sales and marketing expenses $ 616,546 $ 401,316 $ 215,230 54 %
Sales and marketing expenses increased by $215.2 million, or 54%, in fiscal 2022 , compared to fiscal 2021. The increase in sales and marketing expenses was primarily due to an increase in employee-related expenses of $109.3 million driven by an increase in sales and marketing average headcount of 35%, an increase in marketing programs of $42.0 million, an increase in stock-based compensation of $39.1 million, an increase in allocated overhead costs of $8.2 million, and an increase in employee health insurance costs of $3.2 million during fiscal 2022 .
Research and Development
The following shows research and development expenses for fiscal 2022, as compared to fiscal 2021 (in thousands, except percentages):
Year Ended January 31, Change
2022 2021 $ %
Research and development expenses $ 371,283 $ 214,670 $ 156,613 73 %
Research and development expenses increased by $156.6 million, or 73% in fiscal 2022 , compared to fiscal 2021. This increase was primarily due to an increase in employee-related expenses of $81.2 million driven by an increase in research and development average headcount of 58%, an increase in stock-based compensation of $61.8 million, an increase in allocated overhead costs of $9.3 million, an increase in cloud hosting and related costs of $4.4 million, and an increase in employee health insurance costs of $2.6 million, partially offset by an increase of $9.6 million in software capitalization.
General and Administrative
The following shows general and administrative expenses for fiscal 2022, as compared to fiscal 2021 (in thousands, except percentages):
Year Ended January 31, Change
2022 2021 $ %
General and administrative expenses $ 223,092 $ 121,436 $ 101,656 84 %
General and administrative expenses increased by $101.7 million, or 84%, in fiscal 2022 , compared to fiscal 2021. The increase in general and administrative expenses was primarily due to an increase in stock-based compensation expense of $45.1 million, an increase in employee-related expenses of $18.5 million driven by an increase in general and administrative average headcount of 47%, an increase in legal expense of $14.1 million, an increase in consulting expense of $4.7 million, an increase in allocated overhead costs of $2.4 million, an increase in tax and licenses of $2.4 million, an increase in term-based software licenses of $2.3 million, an increase in corporate insurance costs of $2.0 million, and an increase in employee health insurance costs of $1.3 million during fiscal 2022 .
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Interest Expense and Other Income, Net
The following shows interest and other expense, net, for fiscal 2022, as compared to fiscal 2021 (in thousands, except percentages):
Year Ended January 31, Change
2022 2021 $ %
Interest expense $ (25,231) $ (1,559) $ (23,672) 1,518 %
Other income, net $ 7,756 $ 6,219 $ 1,537 25 %
Interest expense consists primarily of interest expense from the amortization of debt issuance costs, contractual interest expense and accretion of debt discount for our Senior Notes issued in January 2021.
The change in other income, net, during fiscal 2022 compared to fiscal 2021, was primarily due an increase in fair value adjustments for our strategic investments, partially offset by the lower interest income earned on cash, cash equivalents and investments and fluctuations in foreign currency transaction gains and losses.
Provision for Income Taxes
The following shows the provision for income taxes for fiscal 2022, as compared to fiscal 2021 (in thousands, except percentages):
Year Ended January 31, Change
2022 2021 $ %
Provision for income taxes $ 72,355 $ 4,760 $ 67,595 1,420 %
The increase in the provision for income taxes of $67.6 million during fiscal 2022 compared to fiscal 2021 was primarily driven by the intercompany sale of intellectual property from Humio of $57.2 million and an increase in pre-tax foreign earnings.
Liquidity and Capital Resources
Our primary sources of liquidity as of January 31, 2022, consisted of: (i) $2.0 billion in cash and cash equivalents, (ii) cash we expect to generate from operations, and (iii) available capacity under our $750.0 million senior secured revolving credit facility (the “A&R Credit Agreement”). We expect that the combination of our existing cash and cash equivalents, cash flows from operations, and the A&R Credit Agreement will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.
Our short-term and long-term liquidity requirements primarily arise from: (i) business acquisitions and investments we may make from time to time, (ii) working capital requirements, (iii) interest and principal payments related to our outstanding indebtedness, (iv) research and development and capital expenditure needs, and (vi) license and service arrangements integral to our business operations. Our ability to fund these requirements will depend, in part, on our future cash flows, which are determined by our future operating performance and, therefore, subject to prevailing global macroeconomic conditions and financial, business and other factors, some of which are beyond our control.
Since our inception, we have generated operating losses, as reflected in our accumulated deficit of $964.9 million as of January 31, 2022. We expect to continue to incur operating losses for the foreseeable future due to the investments we intend to continue to make, particularly in sales and marketing and research and development. As a result, we may require additional capital resources in the future to execute strategic initiatives to grow our business.
We typically invoice our subscription customers annually in advance. Therefore, a substantial source of our cash is from such prepayments, which are included on our consolidated balance sheets as deferred revenue. Deferred revenue primarily consists of billed fees for our subscriptions, prior to satisfying the criteria for revenue recognition, which are subsequently recognized as revenue in accordance with our revenue recognition policy. As of January 31, 2022, we had deferred revenue of
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$1.5 billion, of which $1.1 billion was recorded as a current liability and is expected to be recorded as revenue in the next 12 months, provided all other revenue recognition criteria have been met.
In January 2021, we issued and sold an aggregate principal amount of $750.0 million of 3.000% Senior Notes due 2029. The net proceeds from the debt offering were $738.0 million after deducting the underwriting commissions of $9.4 million and $2.6 million of issuance costs.
In January 2021, we amended and restated our existing senior secured revolving credit facility (the “A&R Credit Agreement”) and increased the size of the credit facility from $150.0 million to $750.0 million, including a letter of credit sub-facility in the aggregate amount of $100.0 million, and a swingline sub-facility in the aggregate amount of $50.0 million. In January 2022, we modified the A&R Credit Agreement (the “Amended A&R Credit Agreement”) to replace LIBOR with the Secured Overnight Finance Rate (“SOFR”) as the Eurodollar rate. There were no changes to the borrowing amounts or maturity date. No amounts were outstanding under the Amended A&R Credit Agreement as of January 31, 2022.
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts.
Cash Flows
The following table summarizes our cash flows for the periods presented (in thousands):
Year Ended January 31,
2022 2021 2020
Net cash provided by operating activities $ 574,784 $ 356,566 $ 99,943
Net cash (used in) provided by investing activities $ (564,516) $ 495,427 $ (629,631)
Net cash provided by financing activities $ 72,531 $ 800,135 $ 706,144
Operating Activities
Net cash provided by operating activities during fiscal 2022 was $574.8 million, which resulted from a net loss of $232.4 million, adjusted for non-cash charges of $485.4 million and net cash inflow of $321.7 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $310.0 million in stock-based compensation expense, $113.9 million of amortization of deferred contract acquisition costs, $55.9 million of depreciation and amortization, $12.9 million of amortization for intangibles assets, $9.1 million of non-cash operating lease costs and $2.5 million of non-cash interest expense, partially offset by a $14.0 million change in deferred income taxes and a $4.8 million change in the fair value of strategic investments. The net cash inflow from changes in operating assets and liabilities was primarily due to a $616.4 million increase in deferred revenue, a $38.5 million increase in accrued expenses and other liabilities, a $33.2 million increase in accounts payable, and a $32.7 million increase in accrued payroll and benefits, partially offset by a $234.3 million increase in deferred contract acquisition costs, a $125.4 million increase in accounts receivable, net, a $29.5 million increase in prepaid expenses and other assets, and a $9.9 million decrease in operating lease liabilities.
Net cash provided by operating activities during fiscal 2021 was $356.6 million, which resulted from a net loss of $92.6 million, adjusted for non-cash charges of $262.7 million and net cash inflow of $186.5 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $149.7 million in stock-based compensation expense, $66.4 million of amortization of deferred contract acquisition costs, $38.7 million of depreciation and amortization, and $7.8 million of non-cash operating lease costs. The net cash inflow from changes in operating assets and liabilities was primarily due to a $338.8 million increase in deferred revenue, a $33.2 million increase in accrued payroll and benefits, a $33.1 million increase in accrued expenses and other liabilities and a $11.3 million increase in accounts payable, partially offset by $151.0 million increase in deferred contract acquisition costs and a $73.0 million increase in accounts receivable, net.
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Investing Activities
Net cash used in investing activities during fiscal 2022 of $564.5 million was primarily due to the acquisitions of Humio and SecureCircle, net of cash acquired, of $414.5 million, purchases of property and equipment of $112.1 million, capitalized internal-use software and website development costs of $20.9 million, and purchase of strategic investments of $16.3 million.
Net cash provided by investing activities during fiscal 2021 of $495.4 million was primarily due to the sale of marketable securities of $639.6 million and the maturities of marketable securities of $91.6 million, partially offset by our acquisition of Preempt Security, net of cash acquired, of $85.5 million, purchases of marketable securities of $84.9 million, purchases of property and equipment of $52.8 million, and capitalized internal-use software of $10.9 million.
Financing Activities
Net cash provided by financing activities of $72.5 million during fiscal 2022 was primarily due to our proceeds from employee stock purchase plan of $50.3 million, proceeds from the exercise of stock options of $15.9 million, and $8.2 million capital contributions from non-controlling interest.
Net cash provided by financing activities of $800.1 million during fiscal 2021 was primarily due to $739.6 million related to the issuance of our Senior Notes, after deducting the underwriting commissions and issuance costs paid as of January 31, 2021, proceeds from our employee stock purchase plan of $34.3 million, and proceeds from the exercise of stock options of $28.8 million, partially offset by $3.3 million debt issuance costs related to the revolving credit facility.
Supplemental Guarantor Financial Information
Our Senior Notes are guaranteed on a senior, unsecured basis by CrowdStrike, Inc., a wholly owned subsidiary of CrowdStrike Holdings, Inc. (the “subsidiary guarantor,” and together with CrowdStrike Holdings, Inc., the “Obligor Group”). The guarantee is full and unconditional, and is subject to certain conditions for release. See Note 5, Debt, in Part II, Item 8 of this Annual Report on Form 10-K, for a brief description of the Senior Notes.
We conduct our operations almost entirely through our subsidiaries. Accordingly, the Obligor Group’s cash flow and ability to service the notes will depend on the earnings of our subsidiaries and the distribution of those earnings to the Obligor Group, whether by dividends, loans or otherwise. Holders of the guaranteed registered debt securities will have a direct claim only against the Obligor Group.
Summarized financial information is presented below for the Obligor Group on a combined basis after elimination of intercompany transactions and balances within the Obligor Group and equity in the earnings from and investments in any non-guarantor subsidiary. The revenue amounts presented in the summarized financial information include substantially all of our consolidated revenue, and there are no intercompany revenue from the non-guarantor subsidiaries. This summarized financial information has been prepared and presented pursuant to Regulation S-X Rule 13-01, “Financial Disclosures about Guarantors and Issuers of Guaranteed Securities” and is not intended to present the financial position or results of operations of the Obligor Group in accordance with U.S. GAAP.
Statement of Operations Year Ended
January 31, 2022
(in thousands)
Revenue $ 1,450,908
Cost of revenue 402,022
Operating expenses 1,223,452
Loss from operations (174,565)
Net loss (207,274)
Net loss attributable to CrowdStrike (207,274)
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Balance Sheets January 31, 2022
(in thousands)
Current assets (excluding intercompany receivables from non-Guarantors) $ 2,499,941
Intercompany receivables from non-Guarantors 11,900
Noncurrent assets 1,201,620
Current liabilities 1,363,873
Noncurrent liabilities (excluding intercompany payable to non-Guarantors) 1,165,807
Intercompany payable to non-Guarantors 276,919
Strategic Investments
In July 2019, we agreed to commit up to $10.0 million to a newly formed entity, CrowdStrike Falcon Fund LLC (the “Original Falcon Fund”) in exchange for 50% of the sharing percentage of any distribution by the Original Falcon Fund. In December 2021, we agreed to commit an additional $50.0 million to a newly formed entity, CrowdStrike Falcon Fund II LLC (“Falcon Fund II”) in exchange for 50% of the sharing percentage of any distribution by the Falcon Fund II. Further, entities associated with Accel also agreed to commit up to $10.0 million and $50.0 million, respectively, to the Original Falcon Fund and the Falcon Fund II (collectively, the “Falcon Funds”), and collectively own the remaining 50% of the sharing percentage of the Falcon Funds. Both Falcon Funds are in the business of purchasing, selling and investing in minority equity and convertible debt securities of privately-held companies that develop applications that have potential for substantial contribution to us and our platform. We are the manager of the Falcon Funds and control the investment decisions and day-to-day operations and accordingly have consolidated each of the Falcon Funds. Each Falcon Fund has a duration of ten years and may be extended for three additional years. At dissolution, the Falcon Funds will be liquidated and the remaining assets will be distributed to the investors based on their respective sharing percentage.
Contractual Obligations and Commitments
Contractual Obligations
Our commitments consist of obligations under non-cancellable real estate arrangements on an undiscounted basis, of which $10.5 million is due in the next 12 months and $27.9 million is due thereafter. In addition, we have debt obligations related to $750.0 million aggregate principal amount of Senior Notes due in fiscal 2030 and the interest payments associated with the Senior Notes of $22.5 million due in the next 12 months and $146.3 million due thereafter. As of January 31, 2022, we have non-cancellable data center commitments payments of $20.8 million due in the next 12 months and $33.0 million due thereafter. Also, as of January 31, 2022, we have non-cancelable purchase commitments with various parties to purchase products and services entered in the normal course of business payments of $62.7 million due in the next 12 months and $77.7 million due thereafter. We expect to fund these obligations with cash flows from operations and cash on our balance sheet.
The contractual commitment amounts above are associated with agreements that are enforceable and legally binding. Obligations under contracts, including purchase orders, that we can cancel without a significant penalty are excluded. Purchase orders issued in the ordinary course of business are not included above, as such purchase orders represent authorizations to purchase rather than binding agreements.
Other Obligations
In October 2021, we entered into a new private pricing addendum with Amazon Web Services (“AWS”), which provides us with cloud computing infrastructure. Under the new pricing addendum, we committed to purchase a minimum of $600.0 million of cloud services from AWS through September 2026. As of January 31, 2022, we have utilized $53.2 million of this commitment. We expect to meet our remaining commitment with AWS.
As of January 31, 2022, our unrecognized tax benefits included $1.9 million which were classified as long-term liabilities due to the inherent uncertainty with respect to the timing of future cash outflows associated with our unrecognized tax benefits.
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Indemnification
Our subscription agreements contain standard indemnification obligations. Pursuant to these agreements, we will indemnify, defend, and hold the other party harmless with respect to a claim, suit, or proceeding brought against the other party by a third party alleging that our intellectual property infringes upon the intellectual property of the third party, or results from a breach of our representations and warranties or covenants, or that results from any acts of negligence or willful misconduct. The term of these indemnification agreements is generally perpetual any time after the execution of the agreement. Typically, these indemnification provisions do not provide for a maximum potential amount of future payments we could be required to make. However, in the past we have not been obligated to make significant payments for these obligations and no liabilities have been recorded for these obligations on our consolidated balance sheets as of January 31, 2022 or January 31, 2021.
We also agreed to indemnify our directors and certain executive officers for certain events or occurrences, subject to certain limits, while the officer is or was serving at our request in such capacity. The maximum amount of potential future indemnification is unlimited. However, our director and officer insurance policy limits our exposure and enables us to recover a portion of any future amounts paid. Historically, we have not been obligated to make any payments for these obligations and no liabilities have been recorded for these obligations on our consolidated balance sheets as of January 31, 2022 or January 31, 2021.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based upon our financial statements and notes to our financial statements, which were prepared in accordance with GAAP. The preparation of the financial statements requires our management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. See Note 2, Summary of Significant Accounting Policies to our consolidated financial statements included in Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K. We base our estimates and judgments on our historical experience, knowledge of factors affecting our business and our belief as to what could occur in the future considering available information and assumptions that are believed to be reasonable under the circumstances.
The accounting estimates we use in the preparation of our financial statements will change as new events occur, more experience is acquired, additional information is obtained and our operating environment changes. Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in our reported results of operations and, if material, the effects of changes in estimates are disclosed in the notes to our financial statements. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results could differ materially from the amounts reported based on these estimates.
The critical accounting estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below.
Revenue Recognition
We derive our revenue predominately from subscription revenue which is primarily based on the solutions subscribed for by the customer. We recognize subscription revenue ratably over the contract term. Our professional services are available through time and material and fixed fee agreements. Revenue from professional services is recognized as services are performed.
We enter into revenue contracts with multiple performance obligations in which a customer may purchase combinations of subscriptions, support, training and consulting service. Judgment is required when considering the terms and conditions of these contracts. The transaction price for these contracts is allocated to the separate performance obligations on a relative standalone selling price (“SSP”) basis. The SSP is the price at which we would sell promised subscription or professional services separately to a customer.
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Business Combinations
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. The purchase price allocation process requires management to make significant estimates and assumptions with respect to intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience, market conditions and information obtained from management of the acquired companies and are inherently uncertain. Examples of judgments used to estimate the fair value of intangibles assets include, but are not limited to, future expected cash flows, expected customer attrition rates, estimated obsolescence rates, and discount rates. These estimates are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement and tax basis of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
We account for unrecognized tax benefits using a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We establish a liability for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. Our assumptions, judgments and estimates relative to the current provision for income taxes take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. In addition, we are subject to the continual examination of our income tax returns by the U.S. Internal Revenue Service (“IRS”) and other domestic and foreign tax authorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from such examinations. We believe such estimates to be reasonable; however, the final determination of any of these examinations could significantly impact the amounts provided for income taxes in our consolidated financial statements.
Recently Issued Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, included in Part II, Item 8 of this Annual Report on Form 10-K for more information about the impact of certain recent accounting pronouncements on our consolidated financial statements.
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